NBR Complete Transcript: 02-05-2007
Monday, February 05, 2007Breaking Down President Bush's $3T Budget
SUSIE GHARIB: President Bush unveiled his budget today, a $2.9 trillion plan for next year, including billions of dollars for the wars in Iraq and Afghanistan. The president allocated more than a fifth of the total budget to the Pentagon, giving the agency more than $620 billion. About $140 billion of that will go to fighting in Iraq and Afghanistan. The White House also projects a decline in the deficit over the next three years, predicting a $61 billion surplus by the year 2012. The administration hopes to bring the budget in line by cutting spending on discretionary programs and entitlement programs like Medicare and Medicaid. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The president likes to call himself "the decider" and in his new budget, he has decided to make the biggest cut in healthcare. The president's budget director Rob Portman says the goal is to set entitlement spending on a more sustainable path.
ROBERT PORTMAN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET: Balance is not coming at the expense of our nation's commitment to seniors and low- income Americans, quite the opposite. We must begin the reform of these programs now in order to protect those commitments.
GERSH: Over the next five years, the president's budget proposes $66 billion from Medicare and $25 billion from Medicaid. Almost $40 billion of that comes from freezing or reducing reimbursement rates for hospitals, skilled nursing facilities and other providers. Another $4.5 billion would be trimmed from payments to oxygen suppliers, clinical labs and wheelchair providers. Hospitals say they already lose more than 5 percent on an average Medicare patient and cannot afford to take another hit. Chip Kahn represents for-profit hospitals on Capitol Hill.
CHIP KAHN, PRESIDENT, FEDERATION OF AMERICAN HOSPITALS: I think the president's budget is really misguided and at the end of the day, it's going to harm the very people that depend on hospitals in this country, the seniors.
GERSH: The president's budget was literally delivered into the hands of congressional Democrats this morning and they made it clear they have a very different diagnosis for health care spending.
UNIDENTIFIED MALE: We'll give the president a fair hearing on his budget.
GERSH: Topping the list of priorities for Democrats, a $40 billion expansion of the state children's health insurance program. California Congressman Pete Stark believes it's possible to raise that $40 billion by reducing payments to managed care companies that cover Medicare beneficiaries. He is the new chairman of the powerful Ways and Means health subcommittee. Stark says he'll also look for cuts in many of the same places the president does, but he disagrees with how the administration's budget spends that money.
REP. PETE STARK (D) CALIFORNIA: So I wouldn't have any trouble with going through and making Medicare more efficient, if we would use the savings to expand benefits or help children or help expand Medicaid.
GERSH: Even if hospitals and other health care providers end up getting less than they expected from Medicare, it will still be one of the fastest growing programs in the Federal budget, rising around 7 percent a year. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: The president's budget also backs new legislation to require brokerage houses to report the cost basis of stock sales to the IRS. The Treasury says that could ensure more accurate payment of capital gains taxes and could raise a billion dollars over the next five years. The idea is to eliminate the so-called tax gap, the difference between what Americans owe the government and what they actually pay.
The Rise of the Small Cap
PAUL KANGAS: "Higher" is exactly where small cap stocks having been going so far in 2007. For a few years now, the small cap area of the stock market has been facing a wave of dire predictions from Wall Street. Still, the group continues to prove that small can be beautiful for investors. Suzanne Pratt has the story.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's one rally on Wall Street that just won't quit. In the past seven years, small cap stocks have outperformed their large cap peers. Since March of 2000, the Russell 2000 Index, which measures small caps, is up 37 percent. In that same time frame, the Dow is up 24 percent and the S&P 500 has gained just 4 percent. Even though many market pros predict small cap dominance will come to an end this year, so far the Russell is outperforming the S&P 500. Oppenheimer fund manager Mark Zavanelli explains why small cap stocks continue to do well.
MARK ZAVANELLI, SMALL CAP PORTFOLIO MANAGER, OPPENHEIMER FUNDS: Part of it is a momentum story. We continue to see more money coming into the small cap market, effectively chasing the returns that have already been gained in small caps.
PRATT: Still, many experts continue to voice caution about small caps in 2007. They say it's tough to find value in the small cap arena. Others say it's not that small caps will do so poorly this year, it's just that the environment is better for large caps
ZAVANELLI: Larger stocks have underperformed, have had quite anemic returns during this generally good period for the market and we believe they'll catch up over the next year.
PRATT: Most point to predictions for a slowing U.S. economy. Large companies, like General Electric, can better weather the thinner margins that come in a slowdown. Large multinationals with overseas operations are also expected to do well this year because of the weaker U.S. dollar. While Prudential small cap analyst Steven Desanctis expects small caps will under perform large caps, he still predicts positive returns for the sector.
STEVEN DESANCTIS, DIR. SMALL CAP RESEARCH, PRUDENTIAL INVESTMENT GROUP: I think they are going to give you performance that ranges between 5 and 10 percent this year, primarily because valuations are going to catch up to them. At 18.5 times earnings, they do look quite a bit expensive relative to large-caps.
PRATT: One other reason small cap stocks have done so well this decade is that earnings growth has been fantastic. That too is expected to slow with most small cap companies likely to post profit growth only in the high single digits. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Google CEO, Eric Schmidt Forecasts His Company's Future
SUSIE GHARIB: Whatever the direction the Internet heads in over the next 10 or 20 years, Google will play a major role. The search engine is one of the web's biggest players and Google intends to keep it that way. On Friday, its CEO Eric Schmidt addressed a Silicon Valley conference about the future of the Internet. After his speech, Schmidt talked with Paul Rogers of the "San Jose Mercury News" and PBS affiliate station KQED. Rogers began by asking Schmidt about what the Google founder sees as the three possible ways the web could develop in the future.
ERIC SCHMIDT, CEO, GOOGLE: The most conservative of course, is that the sort of strange things that occur on the Internet, the bad things, identity theft and so forth make everyone upset, so upset that they begin to actually regulate some of the creativity and obviously a bad outcome. But it's a possible outcome and there are people, people who care about control and power, who probably don't want the Internet freedoms that are so abundant today. They probably want that vision. We obviously do not. There is a middle ground where firms emerge that can somehow handle identity and management of some of this and they're somewhat regulated. That's a possible scenario. And the third scenario is the scenario we have all been looking for which is true collaboration, true innovation, truly empowering everyone. Obviously we hope the third, but it's not guaranteed. That's the issue that I would like for people to be discussing.
PAUL ROGERS, SAN JOSE MERCURY NEWS: What can Silicon Valley do to insure that the third option is the one that ultimately becomes the future?
SCHMIDT: Well, first place, this is not a technical issue. This is a political issue. People are afraid. People are worried about terrorism. They're worried about thefts and so forth and so on. So governments, legislators, politicians, policy analysts have to begin thinking about how will we write the regulation or the legislation that will both empower people but also protect them from some of the true bad things that are going on, things like infinitely bad spam and things like that.
ROGERS: In your speech, you also said that search is still the killer AP and that it's life changing. What did you mean by that?
SCHMIDT: Everything that you do with information, in an information- rich world begins with search because there's too much to just say, hey I'm going to look at this channel or hey, I'm only going to look at this or I'm only going to read this one source of information. You're going to be searching because of the explosion in information and that's obviously good for Google.
ROGERS: What is the state of Silicon Valley? Have we recovered fully from the tech bubble and what do you see as the challenges going forward?
SCHMIDT: The region is incredibly innovative and the recovery is driven by new models and new ideas. The same freeway, the same buildings, a new model, a new idea, new investors, new passions and that is a cycles that gone on for many, many years in Silicon Valley. It's absolutely completely recovered and I think we're going to have a great few years ahead of us.
SCHMIDT: Clean (ph) tech investing in Silicon Valley certainly is on the upswing. There's more venture capital money flowing into it. Do you expect that that sector is going to continue to expand or is it always going to be sort of a niche business here in the valley and also, what can Google do to get a piece of that action?
SCHMIDT: Google is a customer of such technologies and evidence says that this is going to become a major portion of Silicon Valley over the next 10 years just as biotech became a large portion of the bay area over the last 10 and computers 10 years before that and the reason is that it's a solution that is necessary, important, has good economics and great technology and the researchers are working on it now.
ROGERS: In your talk, you also mentioned four questions that you have about the Internet going forward. Can you explain what those are and why you are concerned about them?
SCHMIDT: Well, what will happen when another billion people get online? Will they demand more from governments or will they just say, "I'm happy." What will happen when everyone records everything? What happens to my privacy when I write down everything I do and then I'm a little embarrassed about what I did 10 years ago? What happens when everything gets photographed because everyone has a camera? We don't know, but we know that end users are going to use these technologies for change. And they're going to drive politicians, political leaders, governments absolutely crazy doing this.
ROGERS: In a recent piece that you wrote for "The Economist" magazine, you said that the last few years have taught us that business models based on controlling consumers or content don't work. Could you explain what you meant?
SCHMIDT: Almost all of the historic models have limitations in what consumers could do. You could only watch television on a television. You could only listen to radio on a radio. Technology now allows you to mix and match, to do anything you want. The business models that empower end users are the ones that will win. The business models that say no to an end use will ultimately be replaced by one that empowers end users because eventually the consumer gets what they want.
GHARIB: Schmidt also says the growth of the global marketplace is helping to inject new life into Silicon Valley. He notes there's a new generation of smart young people who want to be part of the valley experience.
"Commentary"-The Dollar Has Seen Better Days
SUSIE GHARIB: In tonight's commentary, a few thoughts on the global shift away from the greenback. Here's Bernard Baumohl, director of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: The story is a familiar one, an aging boxing champ finally gets beaten by an eager young challenger. In a way, that plot line can be applied to the world of finance today. For more than half a century, the dollar ruled supreme. If you wanted to close a deal anywhere in the world, all you had to do was flash the greenback and the deal was done. Even today, the dollar's attractiveness remains fairly strong.
The U.S. still manages to lure nearly $2 million from foreign investors every minute of the day, every day of the year just to fund the trade and budget deficits. The problem is foreign enthusiasm for the U.S. currency is starting to wane. China, Russia, Japan and some OPEC nations have gradually lightened their portfolios of dollars, preferring instead to invest more in a five-year old currency, the euro.
Indeed, for the first time, the value of all euro notes in circulation exceeds the value of dollars. So like it or not, the dollar is in the process of being replaced as the world's leading reserve currency. What does all this mean for Americans? Not much in the immediate future. But within five years or so, half of all international transactions may be conducted in euros and that suggests the value of the dollar much like the value of a toppled boxer will continue to depreciate in the years ahead. I'm Bernard Baumohl.
"Last Word"-Ebay's Education Auction
SUSIE GHARIB: And finally tonight, here's a novel way to get a college education. Oklahoma Wesleyan University is auctioning off a year of tuition and room and board at the university on eBay. The bidding began yesterday and runs through February 11. It covers fall and spring undergraduate tuition, plus room and board and all associated fees. So far there have been 35 bids, with the price currently sitting at $7,500. The university puts the real cost of a year of tuition, room and board at $23,000. And Paul, the university says the eBay auction is a way of creating some publicity about the school.
KANGAS: You know, what can't you get on eBay? That's amazing.
GHARIB: This is amazing, isn't it?
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened in slightly lower ground as investors backed away to study a slew of mergers and acquisitions which we'll detail shortly. After moving just single digits lower early on, the Dow improved to an 11 point gain by noon when the NASDAQ was still off four points. Despite an easing in oil prices and interest rates, caution seemed to be the order of the day as the market went on to close narrowly mixed. The Dow Industrial Average ended up exactly 8.25 points at 12,661.74. But the NASDAQ fell 5.28 ending at 2470.60, while the Standard & Poor's 500 down 1.40 at 1446.99. In the bond market, the 10-year note rose 4/32 to 98 18/32, putting the yield at 4.81 percent.
Most active big board issue on 16 million shares SLM Corp (SLM), what we used to call Sallie Mae. This is the student loan company and it's tumbling $4.09 on President Bush's proposal to cut student lender rate subsidies by 50 basis points.
This news had an impact on some other stocks in that area of business, like Nelnet (NNI) down $2.65.
And Student Loan (STU) itself off $11.85.
Back to the active list, AT&T (T) down $0.33.
Followed by General Electric (GE) with a dime gain.
Same story with Ford Motor Co (F).
And Pfizer (PFE) edged up $0.08 a share, fifth in volume.
Wells Fargo & Co (WFC) down $0.17.
ExxonMobil (XOM) a $0.13 gain.
LSI Logic (LSI) down $0.14.
There you see Triad Hospitals (TRI) up $6.38. As you heard, it's going private for $50.25 a share.
And Time Warner (TWX), tenth in volume, lost $0.20 a share.
Wal-Mart Stores (WMT) edging $0.44 higher. The company estimates its January same store sales were up 2.2 percent, better than the first estimate of a 1 to 2 percent gain. That was by the company.
Herbalife Ltd (HLF) jumping $7.02. Whitney, a private equity group is offering $38 a share on a buyout. It looks like somebody thinks they're going to have to go higher.
Hanover Compression (HC) up $3.50. The board has approved a merger with Universal Compression Holdings. Hanover shareholders will own 53 percent of the new company and incidentally, Universal Compression stock today was up $10 to close at $71.10 a share.
Longview Fibre (LFB), the timberland company, a $3.44 gain there. Brookfield Asset Management will acquire the firm for $24.75 a share in cash.
And The Mills Corp (MLS) as we touched on earlier, up $3.72. Simon Properties Group and Fairlawn Capital Management bidding $24. That's higher than Brookfield's $21 a share bid, looks like a little war going on there.
Lear Corp (LEA) up $3.97. Carl Icahn as you heard is offering $36 a share to buy all the shares he doesn't own that are outstanding.
Newmarket (NEU) which is in the chemical additives business, after the close Friday reported sharply lower fourth quarter earnings, $0.26 versus $0.64 last year.
And Regal-Beloit (RBC) which makes electric motors and things like that down $4.09. Fourth quarter earnings a bit higher, $0.68 versus last year's $0.63, just in line with estimates but the sales in the last three months have dropped 2 1/2 percent and some investors didn't like that idea.
Lexmark Intl (LXK) off $1.33. UBS Financial downgraded it from "neutral" to "reduce."
On the other hand, we see Kindred Healthcare (KND) moving up $1.61. Stiefel (ph) Nicholas brokerage upgraded it from "hold" to a "buy."
Big board volume leader Google (GOOG) plunging $14.34. There's a considerable amount of concern about growing competition from European telephone service providers over there.
Microsoft (MSFT) $0.58 loss. A "Barron's" article this week cast doubt upon the success potential of the company's new Vista operating system.
Apple (AAPL), there you see down $0.81.
And Cisco Systems (CSCO) $0.37 gain.
Research in Motion (RIMM) up nearly $4. That was fifth in volume.
Then Investors Financial Services (IFIN) up $12.85. You already heard that that's a buyout and for about $65 a share incidentally.
Intel (INTC) $0.16 gain.
Rambus (RMBS) moved up $4.58. The Federal Trade Commission issued a preliminary ruling allowing the company to collect royalties with limits.
Dell (DELL) $0.38 gain.
And Qualcomm (QCOM) $0.72 rise there, tenth in volume.
Cognizant Tech Solutions (CTSH) up $7.12. Fourth quarter earnings, $0.46 up from $0.39 last year and $0.03 above the Street estimate.
Major loser Columbia Laboratories (CBRX) tumbling $3.13. The company is pulling the plug on developing a progesterone gel, major loss in the stock.
Those are the stocks in the news tonight.
